Many ditching free service model to target markets they know will pay a premium

If you had pitched Google (Nasdaq:GOOG) or Airbnb to Peter Hudson back in the day, he’s not so sure he would have invested in those ventures.

Of course, there were already a number of search engines when Google launched in the late 1990s, and who would want to rent out their own room to a complete stranger over the Internet?

“By definition, a good startup idea is one most people think is shitty. Unfortunately, that’s also the definition of a bad startup idea,” said the CEO of Vancouver-based BitLit, a service allowing users to buy discounted ebooks if they already own a physical copy.

“Monetization is hard, and there is a phenomenal focus to monetize, especially among Canadian angels [investors] and venture capitalists.”

Startups – even the ones with great ideas – often struggle to make money when founders with a technical background aren’t willing to make those cold calls or send follow-up emails, according to Hudson, who put his company through the Highline (formerly GrowLabs) business accelerator to assist with its launch.

“The way you gain traction there is by hustling. Software, no matter how good it is, will never sell itself,” he said.

BitLit signed a partnership deal with HaperCollins in July, bringing its catalogue of ebooks up to about 20,000. Hudson, who called Business in Vancouver from Boston, where he was meeting with publishers, said his company is preparing to announce another major deal in the coming weeks.

Launch Academy executive director Ray Walia said the issue of monetization is one that constantly comes up among new entrepreneurs he mentors.

“Over the last five years we’ve seen so many free products and ‘freemium’ accounts and people realizing, ‘Hey, I’ve got a product out there, we’ve got five million users but we’ve got no way to make any money off of this,’” he said.

He’s been pushing entrepreneurs to engage in more “customer validation” exercises by getting out of the office, determining what features their customers like and how much they’d be willing to fork over for those services.

Despite already being the world’s largest online dating service, Vancouver’s PlentyOfFish (POF) recruited Agata Osinska as its director of product over the summer to help link potential matches more effectively and entice users to spend more time on the site.

Founded in 2003, POF initially generated money mostly through advertisements. The site has since moved on to offering upgraded memberships that cast a wider net for potential matches.

“What we’re trying to do is understand the value as perceived by the users and offer them something that will encourage them to become upgraded users,” Osinska said.

Those membership benefits include being able to detect when another user views a profile or a personal message has been checked.

But Walia said the “shotgun approach” – trying to attract as many users as possible by offering free services before trying to convert them to paying users – is on its way out.

“You’re starting to see some that are just forgoing the free platform and then going, ‘OK. Hey, how much are you willing to pay for this?’” he said.

Business-messaging startup Slack has attracted about 70,000 paying customers since launching in February 2014. Slack specifically targets business clients willing to pay between US$7 and US$100 for its services.

The strategy has paid dividends, allowing the San Francisco-based company, whose CEO, Stewart Butterfield, lives and works in Vancouver, to raise an additional US$120 million in venture capital in October and bring its current valuation to $1.12 billion.